In an effort to understand the delusional madness that has been on display since yesterday, and continuing the series that we started last week, allow us to share with you how we try to cancel the noise around us and focus on the most important and most critical elements that may shape the geopolitical landscape and the markets.

• As we wrote last week, we have initiated some hedging in the portfolios, such as trailing stops, and prior to that we sold a number of positions to generate cash. We still believe that such moves should continue. Geopolitics will be a significant factor in determining market alpha, as we wrote recently. Having at least 25% in cash might be prudent.

• The markets today (Thursday, the first day of the Ukrainian invasion) started the day down more than 2%, but ended up gaining 1.4% on average. Our interpretation is twofold: First, some people stepped up, considering it an opportunity to buy a market that went into correction; and second, even if Russia ends up occupying Ukraine soon, Putin’s madness will backfire for Russia. Sisyphus proclaimed: “I am stronger than the rock.”  

• An indication of the latter point is that the ruble in the last few days has been losing ground and the Russian market today lost more than 33% of its value. We would not be surprised if Putin orders banks, other institutions, and his cronies to start buying equities to prop up the Russian market. We should also ask ourselves: If someone else was leading Russia, would we be caught up in this madness?

• Ukraine is not the target. European stability and the global balance of power are at stake, and to that end, anything and anyone can be expensed, per Putin’s madness. The sanctions are useful, but more decisive measures need to be taken knowing that disproportionality is a rearguard when madness prevails. Putin’s subliminal message that he may use nuclear weapons, requires a pragmatic Machiavellian response. The other rogue player (Xi in China) has Putin’s back which makes the need for decisive measures more imperative, before – God forbid – we see military action in the South China Sea.   

• The lesson we should retain is that when we discuss matters of security, we should always have in mind that we need:
  • National security (military readiness, protection against cyber-attacks, etc.)
  • Food security (start developing food valleys)
  • Energy security (alternatives and Plan B)
  • Trade Security (a major war interrupts trade routes and could lead to major recessions)

• The market horizon is unclear. Chances are that the Fed will raise rates by 25 bps rather than 50 bps. We have some reservations as price pressures may intensify due to energy, food, and materials interruption. Caution is prudent.